Category Archives: Licensing

Who dreamt up the idea that licensees must own their improvements?

bonkersIt’s bonkers.

According to the European Commission’s Competition Directorate (DG COMP), which sets competition (antitrust) policy for the European Union (EU), so-called grant-back clauses are potentially anti-competitive (and therefore illegal) in IP licence agreements.

What is a grant-back clause?

What is a grant-back clause? It is a clause in a licence agreement that states that, if the licensee makes any improvements to the licensed technology, the licensee is required to license or assign the intellectual property in those improvements to the licensor.

In many of the licence agreements that IP Draughts encounters, a grant-back clause would be considered normal and uncontroversial by both licensor and licensee. Consider the example of a made in chinatechnology in the consumer electronics field. The licensor is a small start-up business that has lovingly developed this technology over several years, from its origin as the bright idea of an electronics student to the point of bringing to market a commercial product. It doesn’t have the resources or experience to make and sell the product on a large scale, and it appoints an exclusive licensee for the EU territory who has experience of selling consumer electronics, and who will manufacture and sell the product. Or, to be accurate, the licensee will arrange manufacture by a sub-contractor in China.

In a recent transaction between EU-based parties, in which IP Draughts was involved, the parties discussed whether the product might need to be modified by the licensee so as to make it better from a technical or marketing perspective. During this conversation, the licensee commented, without prompting, that “of course” the licensor would own these modifications and would be free to use them after the agreement came to an end. This ownership position would be achieved by including a grant-back clause in the licence agreement.

no brainerSimple, you might think. If the licensee is willing to accept a grant-back clause, how could it possibly be anti-competitive?

Perhaps it wouldn’t, but it would be a brave lawyer who would advise that there was no risk of a breach of Article 101 of the Treaty on the Functioning of the European Union. Let’s consider why this might be.

DG COMP’s view of grant-back clauses

Stating the EU legal position on grant-back clauses accurately requires a host of qualifications, which are tedious but necessary. In the opinion of DG COMP, certain kinds of grant-back clauses, namely assignments-back and exclusive licences-back of licensee improvements, but not non-exclusive licences-back, are potentially anti-competitive. And this only applies if the agreement is sufficiently significant to affect trade between member states of the EU and is therefore subject to Article 101 of the TFEU.

So, you can drive a coach and horses through the qualifications, and the issue goes away, particularly if the licensee is willing to accept the grant-back clause? Not really. Let’s consider the issues in turn.

  1. Does the agreement affect trade between member states, so that it is subject to the Article 101 regime? The case law does not suggest that an exclusive licence agreement covering multiple territories in the EU would fall outside the EU antitrust regime.
  2. Does DG COMP’s opinion matter; surely what counts is whether there is a law prohibiting grant-back clauses? Unfortunately, Article 101 is expressed in rather general terms, and it is necessary to look at case law and practice to understand which clauses – other than the obvious no-nos such as price fixing clauses – would fall foul of Article 101. A significant part of that exercise is looking at what DG COMP considers to be in breach of Article 101.
  3. Surely if the parties have specifically agreed to a term, it can’t be anti-competitive? Unfortunately, this argument is flawed. By definition, parties who have entered into an anti-competitive agreement have agreed the offending terms. There is no principle, as far as IP Draughts is aware, in the jurisprudence, that says that if a licensee volunteers the suggestion of anti-competitive term, that makes it alright.

ice breakerIt is open to parties to undertake their own economic and legal analysis of the market, their position within the market, the effect of the term, etc, and conclude that a term is not anti-competitive. However, this may not cut any ice with the court or DG COMP, if the matter comes to be investigated or litigated. There are so many judgment calls in competition theory – what is the relevant market, how open is the market, etc, etc – that it is difficult to predict how another economist or lawyer would view the matter.

In any case, most parties don’t have the budget or stomach for undertaking an analysis of this kind. Instead, many parties prefer to fit their agreement within one or both of the Technology Transfer Block Exemption Regulation (TTBER) or DG COMP’s Guidelines on Technology Transfer Agreements.

So, what do these documents say about grant-back clauses? First, the Guidelines, which include the following text:

An obligation to grant the licensor an exclusive licence to improvements of the licensed technology or to assign such improvements to the licensor is likely to reduce the licensee’s incentive to innovate since it hinders the licensee in exploiting the improvements, including by way of licensing to third parties.

The application of Article 5(1)(a) [of the TTBER] does not depend on whether or not the licensor pays consideration in return for acquiring the improvement or for obtaining an exclusive licence. However, the existence and level of such consideration may be a relevant factor in the context of an individual assessment under Article 101. When grant backs are made against consideration it is less likely that the obligation creates a disincentive for the licensee to innovate. In the assessment of exclusive grant backs outside the scope of the block exemption the market position of the licensor on the technology market is also a relevant factor. The stronger the position of the licensor, the more likely it is that exclusive grant back obligations will have restrictive effects on competition in innovation. The stronger the position of the licensor’s technology the more important it is that the licensee can become an important source of innovation and future competition. The negative impact of grant back obligations can also be increased in case of parallel networks of licence agreements containing such obligations. When available technologies are controlled by a limited number of licensors that impose exclusive grant back obligations on licensees, the risk of anti-competitive effects is greater than where there are a number of technologies only some of which are licensed on exclusive grant back terms.

Thus, DG COMP’s position on this issue is nuanced, and the risk of a breach may be lower if the licensor pays a market price for the grant-back. For this reason, many licence agreements that IP Draughts sees include an option to acquire rights for market value, rather than a free and automatic grant-back. Judging whether the licensor’s technology has a strong market position may be a more complex issue to resolve.

The above text refers to Article 5(1)(a) of the Technology Transfer Block Exemption Regulation, which reads as follows:

The exemption provided for in Article 2 [ie the block exemption] shall not apply to any of the following obligations contained in technology transfer agreements:

(a) any direct or indirect obligation on the licensee to grant an exclusive licence or to assign rights, in whole or in part, to the licensor or to a third party designated by the licensor in respect of its own improvements to, or its own new applications of, the licensed technology;

greyThis is part of what used to be called the grey list, ie terms which fall outside the block exemption but which are not so bad as to be included in the list of “hardcore” clauses (formerly known as the black list).

Over to you, readers. What would you do in the negotiations described above? Would you include in the licence agreement an obligation to assign back improvements automatically and without further payment? Or an option to acquire the improvements for market value? Or none of the above?

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A fresh look at indemnities

have a goFollowing last week’s post about indemnities, IP Draughts has had a go at drafting an indemnity clause from first principles, without ‘cutting and pasting’ any traditional indemnity language. His attempt can be found here.

Some points to note:

  1. The core parts of the indemnity are in clauses 1.1 and 1.2. These clauses simply use the term “indemnify” and avoid wording such as “hold harmless and defend”. Instead, the scope of the indemnity is explained in later clauses.
  2. The indemnities are designed to place responsibility on a licensee of intellectual property to indemnify the licensor, except where the liability arises from the licensor’s breach of contractual warranties (in which case the licensor indemnifies the licensee). For example, the indemnity under clause 1.1 would operate if the licensee sells a defective licensed product, his customer is injured and the customer brings a claim against the licensor.
  3. The defined term “Commercialising Entities” broadens the reach of the indemnity beyond that of many indemnities, and IP Draughts is in two minds about this aspect. It might be argued that, as the indemnity covers claims made against the licensee by third parties, it is unnecessary to spell out who those third parties might be, eg by referring to ebaythe indemnity covering use of a licensed product by people far down the supply chain, eg the child of someone who buys a licensed product on eBay from the licensee’s customer. However, an alternative view is that if the indemnity is intended to cover all liabilities that may arise from the use of the product, it is best to be explicit about this aspect. IP Draughts would be interested to hear readers’ views.
  4. The most ‘novel’ aspect of this indemnity clause is probably clause 1.4, which seeks to address questions of interpretation that have probably been the subject of reported cases, as can be seen from the case references in Contractual Indemnities by Wayne Courtney, an excellent book that was reviewed in last week’s blog posting.
  5. Clauses 1.5 and 1.6 address points that are sometimes covered in detailed indemnity clauses. IP Draughts is grateful to his friend and former colleague, Matthew Warren of Bristows, for sending him a very detailed indemnity clause after reading last week’s blog posting, which provided a convenient shortcut to drafting these terms. IP Draughts has filleted most of the ideas from Matthew’s clause but used simpler, and probably less watertight, language. Some points have been omitted, eg an obligation of confidentiality on the indemnifier with respect information learnt from the beneficiary. This point might be covered in a separate confidentiality clause of the agreement. Similarly, if it is intended to give officers and employees personal rights to enforce the indemnity, a separate ‘third party rights’ clause should make this point clear.

Clearly, there is a great deal of detail in the attached wording, even with the simplified wording that IP Draughts has used, and in several cases there are choices to be made by the drafter, eg whether to include an obligation to mitigate losses under clause 1.5(c). There are, no doubt, other points of interpretation and litigation practice that could be addressed.

What do you think of the clause?




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Standard international software licences: a pipe-dream?

opiumMany years ago, when IP Draughts was a junior associate, one of his regular clients was a software standards organisation whose members included most of the world’s largest computer companies. Although the organisation was UK-based, many of its members were US corporations.  On more than one occasion, IP Draughts heard members encouraging the organisation’s UK staff to be more international in their outlook, which in practice seemed to mean being more American.

On a similar note, IP Draughts vividly recalls the person who gave him instructions on behalf of this organisation, a lady with the title Head of Legal and Commercial, or similar, making adverse comments about an English court judgment that came out at the time. The judgment concerned the interpretation of a software licence, and IP recalls that it took a different line to a US judgment on a similar subject. The client seemed to be offended that an English court took this decision, and she was of the opinion that it was not in the UK’s interests to have laws that differed from those of the US in the area of software transactions. It should be pointed out that this client was English, but her working experience was in a US commercial environment. IP Draughts suspects that if she had been a US national she would have been more diplomatic in her comments, if she had chosen to make any comment on such a subject to a snotty-nosed English lawyer in his twenties.

These memories are prompted by two recent events.  The first is the striking observation by Larry Page, the head of Google, in light of the recent European case on the “right to be forgotten”. He is reported as saying that he regretted not being “more involved in a real debate” about privacy in Europe, and that:

We’re trying now to be more European and think about it maybe more from a European context… A very significant amount of time is going to be spent in Europe talking.

leido bookSome of the commentary on this subject has suggested that, for a US organisation, freedom of speech is a constitutional right which trumps other considerations; by contrast, European laws and attitudes, while they value freedom of speech, don’t give it this kind of overriding status.

The second event that prompts this memory is the publication of a new book, Realising the Single Software Market: Cross-Market Validity of Software License Agreements, by Jan Leido. This 627-page book is the PhD thesis of Mr Leido, a research student at Umea University in Sweden, and according to his website biography he is due to defend his thesis orally next week.

The book compares US and German laws in relation to software licensing, and as the abstract explains:

…cross-national validity of certain standard software license agreements is examined as a solution to overcome national differences and improve the emerging single software market. Cross-national validity is mapped, explained and improved under American and German law.

This book is an impressive mixture of academic and commercial discussion of the many factors that affect international software licenses and their validity, and deserves a wide audience. If IP Draughts had read it 25 years ago, he would have been armed with much better answers to the peevish complaint of his former client. More seriously, the book should be part of the prior reading for anyone involved in advising major consumer software providers on their international licensing terms.

IP Draughts wishes Mr (and surely soon to be Dr) Leido the best of luck with his viva voce.

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Two shades of grey: final version of EU TTBER is published

mailShortly before 5 pm yesterday, as IP Draughts was dreaming of the weekend ahead, an email popped into his inbox from the Law Society’s ever-helpful European Office. It alerted him to the publication of the final version of the EU Technology Transfer Block Exemption Regulation (TTBER), which will come into force on 1 May 2014. The final, substantive text, together with an updated version of the European Commission’s (EC’s) Guidelines on Technology Transfer Agreements, can be found here, though it seems they have not yet been published in the Official Journal.

See also the EC’s press release, and their Memo (also described as FAQs) document; the latter provides a slightly more detailed summary of the changes.

In essence, the documents are changed very little from the drafts that the EC circulated over a year ago.  The EC apparently received 56 responses to their consultation on the first drafts, a majority of which seemed to dislike the EC’s proposed changes to the 2004 TTBER. IP Draughts led the team that commented on the earlier drafts on behalf of both the Law Society of England and Wales and the Intellectual Property Lawyers Association. We certainly disliked the changes, and argued for a more liberal regime generally. A copy of that submission appears on the EC’s website here. This blog has discussed the drafts in brief, eg here.

For practical purposes, the main changes to the TTBER, in both the first and final drafts, are in Article 5, headed “excluded restrictions”, but which IP Draughts prefers to call the “grey list”.

Emeritus Professor Valentine Korah of UCL Faculty of Laws

Emeritus Professor Val Korah of UCL Faculty of Laws

First, some background. In previous TTBERs, the “hardcore restrictions” in Article 4 were known as “black-listed clauses”, and following this colour theme, Article 5 restrictions were known as the “grey-listed clauses”. Certainly, (now Emeritus) Professor Val Korah referred to them by this name when she taught competition law to IP Draughts in the 1980s. Including a hardcore/black-listed clause in your agreement brings the entire agreement outside the safe harbour of the TTBER and is very likely to result in a breach of Article 101 of the TFEU.

By contrast, including an excluded/grey-listed clause merely means that you have a clause that is not within the safe harbour, but the rest of the agreement may be within the safe harbour. The EC is suspicious of grey-listed clauses, but not to such a great extent as in the case of black-listed clauses. It is up to you to justify the inclusion of the grey-listed clause to the court, if this issue arises in litigation. In summary, it is a very high risk strategy to include a black-listed clause, and a lower risk strategy (but still risky) to include a grey-listed clause.

Two changes have been made to the grey list in the 2014 TTBER:

  1. Licensee improvements. Article 5 grey-lists an obligation on the licensee to assign or exclusively license back to the licensor any improvements made by the licensee to the licensed technology. Under the 2004 TTBER and its predecessors, this applied only to “severable” improvements, ie those which could be used without infringing the original, licensed technology. The EC has now abandoned the distinction between severable and non-severable improvements, and grey-lists  assignments and exclusive licences of all licensee improvements.
  2. No-challenge clauses. Article 5 also grey-lists an obligation on the licensee not to challenge the validity of the licensed IP. Under the 2004 TTBER and all its predecessors, Article 5 went on to explain that a clause allowing the licensor to terminate the licence agreement if the licensee did  mount such a challenge was not grey-listed. By implication, therefore, a clause allowing termination was within the TTBER, and in practice many, or most, licence agreements that IP Draughts has seen include such a right of termination. However, under the 2014 TTBER this “right” to terminate is limited to exclusive licence agreements.

glass half fullThe first draft of the 2014 TTBER would have deleted all reference to a right of termination but in the final text the EC has reinstated the right for exclusive licences only. So (if taking a “glass half full” approach) one could say that progress has been made during the consultation process. As the EC has noted in its summary of responses, some commenters (including the Law Society) objected strongly to the notion that a licensor could be prevented from terminating the licence of a party that was challenging the licensed IP.  This would lock a licensor into an agreement with its enemy in litigation, and would be a disincentive to licensing. During the consultation process, IP Draughts made comments to this effect in a public meeting at which EC representatives were present, but he felt those representatives were unsympathetic in their response.

The EC has explained its change of heart in the following terms:

In light of the second consultation, the TTBER will continue to cover termination clauses in exclusive agreements when the relevant market share thresholds are not exceeded. In case of exclusive licensing the licensee generally has no incentive to have the IPR declared invalid, but may in particular use the threat of a challenge to put pressure on a smaller innovating licensor. Automatically exempting termination clauses only in cases of exclusive licensing will lead to a proper balance between, on the one hand preserving incentives to innovate and license out, and on the other ensuring that invalid IPR are removed as a barrier to innovation and economic activity. This will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees.

These comments seem to echo some points that were made in the Law Society’s comments on this issue, including:

The change would particularly prejudice SMEs who are licensors, as they are least able to defend an attack on their patent portfolio by a large licensee.

There are a few other changes in the 2014 TTBER over the 2004 TTBER, including:

  • passive sales: the list of hardcore clauses previously made an exception (ie allowed) for certain restrictions on passive sales into another licensee’s [EU] territory for a limited, 2-year period. This exception has now been removed. In IP Draughts’ experience, this was rarely an issue in negotiations, so the effect of this change is probably minimal.
  • software licensing: Recital (7) states that the TTBER does not apply to agreements for the “mere reproduction and distribution of software copyright protected products as such agreements …are more akin to distribution agreements”. In other words, these agreements should be considered under the block exemption regulation for vertical agreements. In IP Draughts’ view, the EC is having second thoughts about the inclusion of software licensing within the 2004 TTBER.  Actually, IP Draughts has come to a similar conclusion in recent years, ie that much software supply is closer in concept to a supply of goods than it is to a licensing of technology.

The exclusion of certain software licences is further explained in the new Guidelines for Technology Transfer Agreements:

(62) The licensing of software copyright for the purpose of mere reproduction and distribution of the protected work, that is to say, the production of copies for resale, is not considered to be “production” within the meaning of the TTBER and thus is
not covered by the TTBER and these guidelines. Such reproduction for distribution is instead covered by analogy by Commission Regulation (EU) No 330/201042 and the Guidelines on Vertical Restraints. Reproduction for distribution exists where a licence is granted to reproduce the software on a carrier, regardless of the technical means by which the software is distributed. For instance, the TTBER and these guidelines do not cover the licensing of software copyright whereby the licensee is provided with a master copy of the software in order to reproduce and sell on the software to end users. Nor do they cover the licensing of software copyright and distribution of software by means of “shrink wrap” licences, that is, a set of conditions included in the package of the hard copy which the end user is deemed to have accepted by opening the wrapping of the package, or the licensing of software copyright and distribution of software by means of online downloading.
(63) However, where the licensed software is incorporated by the licensee in the contract product this is not considered as mere reproduction but production. For instance, the TTBER and these guidelines cover the licensing of software copyright where the licensee has the right to reproduce the software by incorporating it into a device with which the software interacts.

IP Draughts is also pleased to see some improvements in the drafting of the final 2014 TTBER, compared with the first draft, including some which address points that the Law Society made on the definitions of what are now “technology rights” and “technology transfer agreement”.

norrisOverall, IP Draughts has the sense that the EC’s Competition Directorate continues to have a deep distrust of IP rights, and of commercial parties and their lawyers who argue for a more liberal competition law regime for IP licensing. However, at the margins, and in relation to drafting issues, he feels the EC has listened to the comments of the Law Society and others, and has made intelligent revisions to the text of the TTBER (which was not always the case when previous TTBERs were drafted).

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